How to Retire Forever on a Fixed Chunk of Money

These last two articles have focused on how common it is for early retirees to continue making money after they say goodbye to the cubicle. I share stories like that because I’ve seen it happen in so many lives, including my own. Plus, if you do it right, work is fun.

But the downside of all this “side hustle” talk is that you can take it too far, and people start to think that early retirement is possible only if you keep making money afterwards. To the point that I’ve now been hearing many thirtysomething millionaires saying things like,

So these days, I just do a bit of unpleasant consulting work here and there to cover my expenses and to get the employer subsidized health insurance. “

On top of that, it is hard to get mainstream financial advisers to admit that there is such thing as a finite chunk of money that you can live safely on, forever. They say stuff like, “Financial independence is great, but truly retiring from making money? Forget it.”

Related: your spending can be more efficient if you channel it through a good rewards credit card.

This is where Mr. Money Mustache puts a stake in the ground.

Because it IS absolutely possible and in fact very easy, to make a chunk of money last through your lifetime. There is no magic or unusual risk or hope involved, it’s just plain math.

Even with all the complexities of the modern financial world with its booms and busts, OPECs and Brexits and the churning sea of changing politicians and dictators, it still all boils down to a really simple number. And we can illustrate it with this really simple example:

Let’s say you want to be able to spend $40,000 per year, for life, and have that spending allowance continue to grow with inflation. And you never want to make another dollar from work in your lifetime.

In this situation, the following three sentences represent the entire universe of probability for you:

If you retire with $800,000 in investments, you willprobablymake it through your whole life without running out of money (a 5% withdrawal rate)

If you start with a $1 million nest egg (a 4% withdrawal rate), you will very likely never run out of money

If you start with a $1.33 million chunk (a 3% withdrawal rate), it is overwhelmingly certainthat you’ll have a growing surplus for life.

Now, these statements do all depend on the continued existence of a productive human race which continues to innovate and trade and not destroy its own productive capacity.

But you know what?

In the event of a global apocalypse, you won’t be thanking yourself for spending those last few years in the office accumulating a few last shares of index funds anyway.

The strategies described in this blog are designed to shift us all to a more sustainable, healthy, productive economy. So when you live a Mustachian lifestyle, you’re boosting the likelihood of an apocalypse-free future for all of us. Thus, because of you, We are all going to do just fine.

So. A fixed chunk of money is about as safe a retirement strategy as you’ll ever find.

It’s safer than relying on any job, because keeping a steady job depends on the overall economy remaining healthy enough to feed your company, your company remaining solvent, and you remaining productive and useful to that company.

Meanwhile, a good investment portfolio just depends on the world economy in general continuing to exist.

But once you’ve got that chunk, how do actually convert it into a safe stream of lifetime income?

In other words, most of us get to the door of financial independence with something like this:

A complex financial picture with lots of dollar signs – but can you retire on it?

But what we really want is something like this:

This is how money flow really works in early retirement..

So What Is The Problem?

Most people get stuck on the same three questions:

What investments do I use to provide a lifetime of income?

A big chunk of my savings are in 401k or pension, locked up until I’m 59. How do I retire at 35?

How can I pay for (US) health insurance on a $3300 per month budget, when I’ve heard monthly premiums can exceed $1200 per month for a family of four?

The great news is that there are easy answers for all three. They are just not widely known because true early retirement (with no backup income) is such a rare field that very few people write about it. So let’s bang out those answers right here:

Investments:

The Simple Path to Wealth is a short book on investing that convinces you that the simplest strategy is also the best.

As always, I suggest that you only need one thing: a generous bucketload of low-fee index funds. It can even be a single index fund if you want to keep it even simpler: Vanguard’s VTI “Total Stock Market Exchange Traded Fund”

Whether you own these funds through your company’s 401(k) plan, or the brokerage account of your choice, or a Vanguard account, or through an automatic management service like Betterment* as I do, doesn’t matter. What matters is that you are buying pieces of real, profitable companies, which pay dividends and appreciate over time.

Okay, got the funds, Now What?

Okay, you’re 35 years old, you have saved exactly one million dollars, and handed in your resignation.

At this point, you will probably have at least two chunks of money: a normal chunk (also known as a taxable account), and a retirement chunk (perhaps a 401k, IRA, or pension).

Let’s suppose it is divvied up like this:

When you retire early, you Use up your taxable accounts first.

On your first day of freedom, you log into your account, find the option for what to do with dividends, and set those to get automatically deposited into your checking account.

Right now, the VTI fund happens to pay a 1.89% annual dividend, which means that the $500,000 account in that green box above will pay $9000 in annual dividends straight to you.

Then, if you’re shooting for $40,000 of annual spending, simply set up an automatic monthly withdrawal of an additional $31,000 per year ($2583 per month) to be sent to your checking account, which is set to automatically pay off your credit card, which you use to buy your groceries.

But Won’t I Run Out of Money If I Do This!?

That’s the magic of early retirement math – the answer is NOPE! Because check out how this plays out:

Because of those withdrawals, your account will lose a few shares every year.

But because of natural stock market growth, your account will be fighting back and each share will be worth a bit more.

Thus, your money lasts much longer than it would if you were just keeping it all in a checking account or stuffed in your mattress.

So a quick spreadsheet simulation of this drawdown reveals that your account survives almost 23 years. At which point you are 58 years old – almost eligible for penalty-free withdrawal of your true retirement money.

BUT, during this whole time, that other $500,000 in your retirement account grew untouched (and untaxed), and it’s now worth about $1.2 million dollars even after accounting for future inflation**. In other words, you have WAY more than enough to live on forever at that point.

Here’s a quick spreadsheet with simple assumptions and 4% after-inflation stock market returns. In this situation the first 500 grand lasts about 23 years.

And here’s the same thing, except I did it in Betterment’s fun retirement income simulator, using a 95% stock portfolio. This version is slightly less optimistic, but still gets us out to almost 20 years in the most probable scenario.

If you have a really large locked-up retirement balance and a small taxable account, you might want to tap into the retirement account sooner. There are ways to do that penalty-free too, see this earlier MMM article for a few ideas.

The overall lesson: It doesn’t matter how you have your investments split up between normal investments and retirement accounts. It just matters how much you have in total.

Heck, even if you are stuck with a $1 million house occupying a huge part of your net worth, you can convert that into livable money: sell the house, put the cash into index funds, and use the resulting cash stream to rent a spiffy but reasonably priced house or apartment in the lovely walkable area of your choice.

Okay, What About Health Insurance?

If you are stuck in the world’s most expensive medical care market like I am, the most profitable investment of all may be salads, bikes, and barbells because these virtually eliminate the “lifestyle diseases” that trigger about 75% of US healthcare spending.

But even so, most people choose to insure against surprise medical bills, and people with existing medical needs depend on help with those costs.

The good news is, the politically controversial Affordable Care Act actually handles this much better than most people assume. If I go to healthcare.gov right now (or in my case the Colorado-specific equivalent) and put in a hypothetical 4-person family with a $40,000 annual income in my zip code right now, I see this:

This represents a cost reduction of $830 per month relative to what a high-income person would pay for the same coverage. So in other words, the United States just has a progressive tax bracket system like other rich countries, chopped up a little differently. It’s not great and to be clear, this is shitty health insurance because it has a high deductible. But at least it’s not a retirement-buster.

Other Things You Probably Don’t Need To Worry About But Everybody Does

What if Stocks fall or My Cost of Living Goes Up?

Stock market crashes are never permanent. In the long run, the market always goes up. So all that happens during a crash is that those few shares that you do sell during those brief times when the market is down, will hurt your account balance just a bit more. Within a year or two, the market is back up and your remaining stocks are more valuable than ever. If you want even further reassurance, you could just choose to spend a bit less money during this time.

As for your cost of living going up faster than inflation – it rarely happens. And if it does, you can adjust by spending less in other areas. Most things are in your control, especially if you take a big-picture view. You can shop around, move, and alter your lifestyle in a million different ways, and in fact this is really good for you.

Standard retirement advice is based on protecting people from any form of hardship or change, which is completely counterproductive. In the right quantity, these are the backbone of a good life and the fuel for personal growth. Without them, you will melt into a whining puddle in front of a television that endlessly blares Fox News.

The quick answer is that stocks earn more money on average, especially right now in 2018 with bond yields so low. Sure, stocks are more volatile, but volatility only bothers fearful people who look at the stock market every day and fret when it jumps around. As a Mustachian, you don’t do this. Lower stock prices are simply a temporary sale on stocks.

What About All Sorts of Other Stuff Not Covered in this Article?

The absolute key to success in early retirement, and indeed most areas of life, is to get the big picture approximately right and not sweat the small stuff. And design the big picture with a generous Safety Margin, which allow lots of slop and mistakes in your original forecasts and allows you to still come out with a surplus.

For example, in the story above I assumed a $40,000 annual spending rate, which is way more than almost anyone really needs to live well here in the US, especially once your kids are grown. I completely ignored Social Security, which will benefit most people at a level between $1000 and $2500 per month for a big portion of their older years. I ignored any incidental income or inheritances or profits you might make on selling your house someday, and the list goes on.

So that’s the line in the sand.

Although I personally think working hard almost every day after your retirement is good for you, it is also completely optional, and you do not have to earn any money at it if you don’t want to.

A chunk of money is a perfectly good retirement plan, and the math doesn’t care if you are retiring at 5 years old or 85. If you get the numbers right, you’re set for life.

—–

*Betterment, Wealthfront, and Personal Capital are investment management systems known as “Robo-Advisors”, which typically buy shares on your behalf and then add on features like rebalancing, tax loss harvesting and personalized advice. I happen to use Betterment because I like the interface and benefit from their tax loss harvesting more than pays for their service fees in my own tax situation.

Betterment purchases a flat rate advertising banner elsewhere on this site, although I don’t get paid for mentioning them or for any new customers they might get. And blog affiliates/advertisers have no say in what I choose to write.

** For this calculation, I assumed the stock market delivers a 4% rate of return including dividends, after inflation. (or roughly a 6-7% total annual return)

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“Meanwhile, a good investment portfolio just depends on the world economy in general continuing to exist.”

I think that’s probably my favorite line here because it’s just that simple for the majority (like 95%) of people’s circumstances. We supercharge our retirement even though we’re planning early retirement because that money is expected to grow tax free, which is what we’re planning to leave behind as legacy. Otherwise I wouldn’t be very interested in FIRE if we can’t pass it on.

Out of curiosity, do you hold any small or micro cap stock that are too small to be included by Vanguards small caps funds?

I’m curious as to why you aren’t interested in FIRE if you can’t pass your money on. Seems like those are two different things entirely: (1) wanting to RE and (2) wanting to pass money on to your children/heirs. You can do both or just one or the other.

What an amazing post. This is my absolute favorite post across all FI blogs. It helps me put together all the FI pieces. Blew my mind that the math allows us to withdraw from Principal amount (4% rule) and still be ok for many years. The table used really breaks it down nicely. And this post also helps you understand the complexity around keeping health insurance while you are no longer actively working.Grear info around what to do with your wealth stuck in 401k/ira and in your house equity.The book referenced in this blog is amazing. Posts like that makes one a believer that FI can be so within reach to so many people. Once you believe that you can achieve it, that is a game changer as you will take more and more action towards FI, which in turn will breed more action and more results.This post is a life changer!!!

Yes, excellent post. I read one FIRE post where they were saving 70% of their income and split it as follows: 60/40 where 60% went to investments and 40% went to savings. The savings were put aside to live off of while the 401k was unable to be touched until age 59 1/2. I thought that was really smart. It is the same concept here, but this post really breaks it down. Thank you!

Nice back-to-the-basics post. Besides a good buying opportunity, the next stock market correction/crash will provide good writing material for FIRE bloggers such as yourself :) . I mean, it’s easy to criticize the FIRE movement when it is happening during a long period of neutral to positive market years. It’s another thing to criticize FIRE when it can be demonstrated to work through a big sell-off.

Or, you could look for ways to make work less of a painful experience by gaining influence and building relationships. That assumes you’re not dead-set on mountain biking all day long by age 30?

There are ways to create a balance in your working life. It’s not torture to make a paycheck, especially if you avoid being a complainy-pants and strive to improve yourself. FI is just a nice option to have when you’re ready to make a leap into something different.

We retired in our late 50’s with 40k income. Our health insurance was 10k. It was better than ACA because it comes from a former employer. We had a paid for home and car. We decided to live on this for a year in a MCOL. We went to cheap cell plan that only worked in big cities. Cut everything we could, took no vacations and didn’t eat out. It was not fun. Some fun work fell into my lap a year later and 5 years later I still enjoy it. We found that our comfortable spending was between 60-70k/year depending on if we take 1 or 2 vacations a year. I recommend trying a certain amount of spending before you quit your job and commit so you can determine if that level works for you.

So in our location–north carolina–with a very similar income picture the monthly cost was $300 for ACA insurance, and is going up to $500 for 2018. This is with a subsidy of over $2000 per month for our family of 2 people. The problem with this insurance is the $11,800 in network deductible. For the last 3 years my wife has had a chronic illness that has kept her virtually home bound. Lots of doctor visits and attempts to get a diagnosis and treatment, but the best that can be done is keep trying to move forward and seek out a solution. This means we spent the $11,800 + premiums in the last 2 years before getting full coverage, and during 2018 doctors have convinced us to try daily infusions of drugs costing over $3,000 per month and not “in network” so it is fully out of pocket.
We are both athletic and ride bikes, hike, lift weights etc. Her activity before the illness included 20-50 miles per week hiking in the appalachian mountains. We eat well, drink moderately etc, but the illness still happened.
While the savings has “saved” us, and we would have more than enough if this situation had not popped up, the truth is that eventually in every life a bout of expensive illness can undercut your plans.
I don’t think any of this contradicts the point of your post, but it underlines that expensive non negotiable things can happen. And while I think the medical system in the U.S. is totally screwed up and way too costly, the options are limited if you happen to be stuck living here. In these cases seeking out employment for insurance may be the only rational thing to do. While I haven’t fully committed to that, I may have no real choice. Thanks for all the great material on your site!

Thanks John for that an interesting bit of data from North Carolina. I have heard that the premiums can vary widely across the US, at least for now. Have you run your stats through the health insurance calculator for other states?

If money were an issue (and for many early retirees it is not, because they have managed to save such a generous safety margin), you could always pick a different place to live, either inside the US or out of it.

I work in healthcare, and there are a lot of problems with pretty much every insurance plan in the US aside from Medicaid. Even the best employer-sponsored plans and Medicare have very limited benefits in multiple areas including home health, specialized nursing care, and medications.

The issues with the ACA plans are even greater, especially in 2019, when some of the actuarial regulations will be rolled back and catastrophic plans come back on the market. In many areas, ACA plans won’t pay for the better hospitals and have even skimpier drug benefits. Don’t get me started on the healthsharing ministries- they have no actuarial standards whatsoever. Certainly people can move to areas with better coverage, or live within Medicaid eligibility limits, but that doesn’t solve all the issues.

What if someone needs 24/7 nursing care for months to years? Or needs to spend several years, even his or her whole remaining life, in a nursing home? I have seen this happen to quite a few young people as a result of car and bicycle accidents. It’s not a rare occurrence. Needing expensive medication that is only available in the US is not that rare, either. Nor is the need for specialized cancer treatment available at only a few centers in the US. Nor is the need for expensive immunosuppressives for organ transplants. People can work out and eat well all they like, and these things still happen.

How can someone afford this on 40k a year? What country would provide such care to noncitizens? How would you suggest people plan for such eventualities?

I agree with your calculations, but I don’t understand how retiring on 40k or 80k a year can prepare for these not uncommon situations. How would you counsel people?

The answer is that A F.I.R.E advocate will be much better off than the majority of people in the United States. At the moment of onset of your catastrophic illness, you will likelyly have over a million in assets. The vast majority of people will have $200K or less. And either way, you are not likely to continue working after a catastrophic illness.

But in the US, unless you are on Medicaid, your insurance isn’t comprehensive, and an ACA plan vastly less so. I’d be bummed if I got stuck with a 500k bill for a medevac or 1 mm in NICU costs or 3k a month for meds. 1.2mm won’t go far in those circumstances.

Of course something awful can happen. There’s a chance any of us could be struck by lightning or run over by a bus. In every business, decisions are made on a daily basis based on risk and confidence level. For me personally, after working for 30 years, if I can retire before 60 (FIR – no longer FIRE!) with a 90% confidence level that my assets are sufficient, that is enough.
Just because everyone, including the healthcare industry, puts the almighty dollar above all else, doesn’t mean we have to live in fear and plan for the exception rather than the rule.

“How can someone afford this on 40k a year? What country would provide such care to noncitizens? How would you suggest people plan for such eventualities?”

Japan for one, and I’m sure a bunch of others. Residency is required, but not citizenship. My wife is Japanese, so this will always be our catastrophic backup plan.

Also, I remember healthcare being exceedingly cheap as a *traveler*, not even resident, in such far-flung places as Argentina and Jordan. For those not married to their location, there are options. The only limits are those you make for yourself.

New Zealand is another one. Again, available for residents – no need to be a citizen, and children are educated and provided with health care even if they and their parents are illegal. All dental care free til 16, I think, or maybe 18. Doctors visits are free for children and those on low incomes.
We do have debate here about how some treatments that are free in Australia are not free in NZ ( such as some breast cancer drugs etc), and you have to be able to afford them. But I think all countries are having these debates.

If you have an extremely rare form of cancer that can only be treated in a few specialized hospitals that only the most expensive insurance will cover and these hospitals provide absolutely no charity care then you will probably die if you are not rich. We will all die at some point whether we are rich or not. Is it worth giving up your life to keep working to save up multiple tens of millions of dollars so you can possibly avoid dying in that scenario? I would say no.

I couldn’t agree more.
I’m reading these “what if” responses and it occurs to me that people who are reading MMM still just don’t get it. If you want a guarantee that retirement, or life in general, is going to be problem free, you’ve come to the wrong place. (An by you, I mean them)
If you are stricken with a rare catastrophic illness or life-threatening injury, won’t be any better off, if you are still employed full time. If you are afraid to leave the house because the sky might fall, I have news for you. If the sky falls the house still gets crushed. It doesn’t matter if its a shack or a mansion. Bad things happen sometimes.

Best portrayed by Forrest Gump : Shit Happens.
I know, its easy to talk without fear about the cost of healthcare, when, you are (like me) Canadian but please, don’t try to plan for the “extreme unplannable”. Just remember, life has no warranty.

Thanks for the reply MMM. We are fairly entrenched in NC currently. Our pre-retirement age income is from 4 small rental houses that are all local, so “up and moving” would be a logistical problem…not that we aren’t considering it.
The main problem with the move idea is the illness itself. While the illness ramped up over several months back in 2015, it wasn’t disabling until a sudden ramp up in August of 2016. Up to that point we assumed it would be something docs could fix. Still hoping of course, but we’re now facing a possibility at age 54 that we have years of continual chronic costs. If that is the case then a move or an insurance providing job may be the only answer, but the move while ill would be a difficult thing.

Florida has to be the WORST for ACA costs as where I live there is only ONE provider in any of the nearby zip codes. Its FloridaBlue and the costs are astronomical ($1,500+) per month for two people and a $14k deductible. It seems to be a government-approved monopoly?!

BUT the beauty of this article I never thought of is once I FIRE, I will likely show less than the $47k threshold as an income and qualify for the reduced rates! SCORE!

I suspect dividend growth investors will do better than index investors in the long run, especially now when the leading index stocks are so overpriced.

Of course, it’s not really surprising that people who study companies and analyze balance sheets can make more income from their capital than those who admit they know nothing and buy an index fund. But if you’re no longer working, you should a lot of time to study and learn.

One of the pluses of DGI is that if you have decent capital, you never have to sell any shares. If you have a good stable of companies in your portfolio, your income will increase as they increase their dividends every year. It is certainly possible to get 4% from a well-balanced DG portfolio, so $1 million will yield a safe $40K.

I do recommend a bit of a cash cushion as well, maybe 10-20% in a ladder of 1-year CDs or something like that. You won’t get much income from this, but this is your safety net.

I absolutely agree with you on DGI aspect. One will not have to worry about lack of money as long as he/she focuses on keeping his/her annual expenses below generated dividends from the stocks. $40K per annum is sufficient to sustain the modest lifestyle of a family of 4.

The bigger problem in the world, as you’ve beaten into your keyboard over these years, is that most people have difficulty wanting to adjust their lifestyle to what is really important. Clown cars and fancy meals included!

Good post covering the basics of the 4% rule . One concern is outliving your money. This calculator combines the retirement projections based on historical stock/bond returns with your longevity probability to give you a better sense of whether you are likely to outlive your money.

Planning for a very long retirement is fine, but as your change of failure creeps up as you get older, the likelihood of you not being around to have your portfolio fail also goes up, in this case quite dramatically as you age past 80. It just provides a useful counterpoint to trying to plan for 100% success in tools like cfiresim or firecalc.

This is great for us to see how things stack up as we start our 2nd decade in retirement. We’re 56 + 58 right now and so will get some social security soon-ish (depending on how we want to do things). It just gives me confidence that we’ll be fine (no chance of going broke!)

Curious you mention the Bond thing. I’m now late 30s & don’t really own any in my portfolio because when the market crashed in my mid 20s it seemed crazy to invest in anything other than stocks that were “on sale”. Tis has worked out pretty well for me over the last 10 years. With interests rates finally hitting 2% & the bull market looking a bit gassed I’ve considered if in the next 3-4 months wouldn’t be a bad idea to move some $ from stocks into bonds. These would be in my retirement account. Curious of others thoughts? I should add that wife & I are currently looking at working 15-18 more years.

I’m about the same age as you. I split the difference between the old school Bogle advice of “hold your age in bonds” and the high equity approach that the FI bloggers seem to have. So we hold (I think) my age minus 17 in bonds, so we’re probably at 20% in bonds now. Remember, holding different asset classes also means you can re-balance every so often, selling equities when they’re expensive and buying cheap bonds, and vice-verse.

Yes owning some bonds is nice as when the market is down you can sell bonds to live off of (or buy/rebalance into discounted stocks), this way you don’t take a hit on your stocks by selling them when market is down. Also, if you do the calcs, having a small bond percentage gives almost identical performance as 100% stocks but with less volatility. It provides a smoother ride with almost the same performance. Think of bonds as a ballast.

Also about your age and sticking to 10% bonds. This is a little smoother than 100% stocks and also is supposed to pay out better. Don’t plan on changing that part of the allocation for quite some time.

The time to buy bonds is when the market is high. The time to buy stocks is when the market is low. Rebalancing a stock/bond split portfolio ensures this will happen. If you currently own no bonds, now (while in a 8+% dip) is probably not a good time to start buying bonds and certainly not a good time to rebalance into them.

Just keeping buying stocks like you have been all the way down and don’t make a shift to bonds until we start hitting record highs again. Especially with a 15-18 year timeline. You’ll have more ups and downs to traverse and this one isn’t at all likely to hurt you being all stocks.

It’s [ACA] not great and to be clear, this is shitty health insurance because it has a high deductible.

Only if you’re used to health insurance from your employer, which is more like pre-paid medical than true insurance. When I first retired @ 45 I was paying $200/mo. for a high deductible individual plan. Then when the ACA mandatory coverages kicked in (along with some really stupid CO State mandatory coverages) the plan went to $300 the first year and $400 the next. Finally, when Obamacare was actually operational a similar plan is over $600/year but of course federal taxpayers pick up the lion’s share of the premium for me.

I have a 1% deductible on my house insurance, which is something like $4000. But that’s what insurance is for, to protect against catastrophic losses, not to cover normal, predictable expenses.

It’s also shitty health insurance because it often carefully doesn’t cover doctors or hospitals that are good at expensive things.

So, sure, in theory it covers cancer treatment, but none of the plans cover the doctor or hospital that specializes in cancer treatment.

So it may be “affordable” and it may have to cover the basics, but as long as it isn’t universal there are LOTS of ways to make sure those plans can avoid paying out when someone really needs the health insurance.

Health insurance is one of the biggest holdbacks for us. I have 2 more years to work (I think, I have to confirm with benefits) before I qualify for retirement health insurance at 55–which cuts 10 years off the risk time before Medicare steps in. I don’t want to keep working, but accessing good employer health insurance for 10 years is worth it.

Especially since politicians keep trying to dismantle the ACA and make it non-functional. I’ve got multiple per-existing conditions (I’m female, I had a kid as two of them) and I don’t want to see how expensive individual health insurance is if the ACA gets gutted. I’d hate to FIRE and then suddenly have $4K a month in health insurance premiums to pay–if I could even get covered.

I’d be ok with catastrophic only (as long as it COVERED catastrophes), but that’s only available to young folks right now.

The problem is that it isn’t really true. You assume an 8.8% annual return. That is assuming the world economy grows at 8.8% every year and you get your share of it. Its assumes inflation will never go over 3%. Those aren’t really true or ven likely.

But the biggest problem is that you ignore a market crash. If you have a million dollars and the market drops by 50%, you now have only $500,000. How is that any different than if you started with $500,000 to begin with? How do you continue to take out $40,000, which is 8% of that $500,000, every year forward and not run out of money?

It’s different because you still have the same number of shares, which will eventually rebound. The only circumstance in which it would be as though you had started with $500K is if you were to cash out all of your shares at the bottom of the crash, which hopefully none of us would do.

It checks your plan using real market data from now (2017) to 1871, so it takes into account the big crashes.

For example, if one invests $1.5 million in the market (75% equity, 25% bonds) and spends 50k per year for 40 years, this retirement plan had a 100% success rate in all market history. Meaning of the 106 individual 40-year periods between 1871 and 2017, not once would you have run out of money with this plan. If your drop the investment to $1.4 million and keep the rest the same, the success rate is 98.1%, meaning in 2 of the 106 40-year periods you would have run out of money. Still a pretty robust plan.

I know, blah blah blah, past performance does not guarantee future performance, yeah yeah yeah I agree. But it is still a good analysis to base a retirement plan on. If I had plan that had only a 50% success rate in the past, I would not feel comfortable with it.

Don’t you have to sell shares at twice the rate you would have otherwise, 8% instead of 4%.? And if the market only grows at an average of 8%, you will continue to have to sell shares at an increasing rate since your portfolio value will remain flat with that 8% growth only making up for the shares you are selling. And that doesn’t take into account inflation. And someone retiring that same year with $500,000 would be able to buy the same stock you own. So if you can take out 8%, why can’t they?

I couldn’t get the calculator to work. But the assumption was 1 million and $40,000 adjusted annually for inflation. That is far different than $1.5 million at $50k. You are essentially saving 10k a year compared to the 60K a 4% take would bring. And while 40 years is fine if you are over 50, if you are under 50 you need to consider the 1 in 10 possibility you will live into your 90’s.

Presumably, that person would not be coming into the stock market with $500,000 to invest all in one day, right at the worst day of the crash! They would have averaged in over the years just like you…so likely anyone with a 500,000 portfolio would be in roughly the same boat, and be looking at a major dip. So, 2 points to make here:
1. The 4% withdrawal rate is never going to be exactly 4%…it is going to average 4% over the years, but depending on whether the market happens to be up or down, it will be more or less than 4%.
2. The 8% per year growth rate is also an average, and one that takes into account major events like a stock market crash. Just as there can be major drops like the 50% one we are speculating about, there could be equally outlandish growth years.

I’m not very eloquent about this, so as MMM already did, I highly recommend reading A Simple Path to Wealth if you haven’t already.

“Presumably, that person would not be coming into the stock market with $500,000 to invest all in one day, right at the worst day of the crash!”

Why do you presume that? Wouldn’t smart people do exactly that? Wait for the market to hit bottom and then buy at low prices? The problem isn’t that you can’t do that, its that you don’t know where the bottom is until long after the opportunity is lost. Whether you have a $1 million dollars or $500,000 and expect the market to crash you should put it in cash and wait for the crash shouldn’t you?

“‘there could be equally outlandish growth years. ”

Yes, there could be. But there never have been. In 2008, the market dropped by half from its peak. It had done the same thing less than a decade earlier in 2000. Neither one got back to its peak nearly as fast as it dropped from it. In the 1929 crash, it took 30 years to get back to the same place adjusted for inflation.

Volatile prices are not really a problem if you don’t need the money. You are correct that on average you will come out ahead. But once you retire, you DO need the money. To meet your expenses you will be forced to sell whether prices are high or low. And the lower the prices are, the more you will have to sell to meet you necessities. Which means when prices go back up, you will have fewer shares recovering their price than you did when they went down. A lot fewer shares. Do that three or four times and you run out of shares.

If someone retired in 1999 at the peak of the market and has used the 4% rule, its likely they will be wiped out if the market goes down again like 2008. Of course most people in that situation have recognized their vulnerability and adjusted their lifestyle to the new reality whether they like it or not.

I think FIRE is just fine if you define Financial Independence as being able to live on half your savings. If you can live on 4% of $1 million and have $2 million in assets, they you are financially independent. Otherwise you are just living on the bubble.

“I think FIRE is just fine if you define Financial Independence as being able to live on half your savings. If you can live on 4% of $1 million and have $2 million in assets, they you are financially independent.”

In other words, you’re arguing for 2% withdrawal rate instead of 4%. That’s a very low WR. Dividends alone for VTI are currently 1.89%.

Most people won’t be coming in with 500k all on one day because it’s a rare private citizen who earns 500k in one day. To have access to 500k all in one day to buy stocks on the lowest day in the stock market, you have to either 1) sell some other investment or property, thus having to factor in that selling price as well, or 2) have 500k ‘spare’ money sitting in cash for years waiting for you to guess the best time to start investing.

So for the majority of private citizens, it’s a comparison that is unlikely to be particularly relevant.

I think most people would go back to work full time or part time if the market severely crashed in the first few years. That’s just human nature. If the market crashed severely after that then there’s at least some growth in the portfolio and you’d be okay. You wouldn’t be withdrawing anywhere near 8%. Not that 6%,etc., would be good, but it’s not 8%. So that’s something at least.

Something that has always bugged me about the FIRE strategy is the prospect of major medical disaster. That is, I get cancer or hit by a bus, requiring significant financial outlay not in my plan. Or this scenario, which is much more likely and affects probably many more people: a parent falls ill and is not financially prepared for a long decline in health. There is no way to MMM your way through an indigent mother with dementia requiring 24-hour care for years.

Also, I noticed that your 500/500 withdrawal scenarios above don’t account for sequence of returns risk. If the market tanks after year 10 of your retirement, you’re probably fine. But, if the market tanks in year two of your retirement, you’re not going to make it to year 20 if you keep pulling money out at the same rate.

Don’t live your life governed by fear. The reason to have catastrophic medical insurance is to calm fears of a possible medical disaster. If you get sick or injured, and I’m speaking from personal family experience, medical insurance will save your financial future. Having a maximum out-of-pocket amount will reduce your disaster into a minor speed-bump.
Also, if you get hit by a bus, game over anyways.

Plus, remember that all I’m really advocating here is saving and investing a shitload of money, through the process of streamlining your lifestyle for efficiency and happiness.

If you do this, you will always be in a better position than your Antimustachian counterpart, who kept the spending high and took less care of his health.

Both of you are subject to risk and random events, but the lower your lifestyle spending and higher your savings, the more protected you are.

And you can always go back to work – on average you are more employable if you are in better mental and physical condition, and these are the things that higher savings, lower spending, and optional early retirement facilitate.

Regarding “sequence of returns” risk: The 4% rule already takes this into account and you’re quite safe regardless of most market fluctuations.

If you retire with a 3% withdrawal rate, it is so safe that there has never been a single market return condition in history that would have been able to wipe you out. They call this a “100% success rate” in cFireSim, and it’s kind of an overkill way to save for retirement (since you can always substitute with lifestyle flexibility instead). But at least it is useful in the sense of putting an upper bound on how much you should possibly save in order to feel safe.

Mr. Money Mustache, pretty sure the point of your lifestyle is not to waste money on stupid inefficient crap. Establish those habits while you are earning income and you will have a happy and fulfilling life after you have stopped earning income. Or as I like to say “I’m a retired person in a young person’s body”.

‘m not arguing against FI and frugality, but the point of this piece seemed to be that it would be fairly easy to stay solvent following a 3 or 4% withdrawal rate. I’m not disagreeing about a market calculations or sequence of returns. I’m talking about catastrophic, unexpected expenses that I see people ensnared by every week in my job.

My point was simply that costs of medical care can escalate quickly beyond what an ER’s budget is. A significant number of folks in the US run into personal or family health, elder, and long term care expenses they had not anticipated and that would blow their projections out of the water, requiring them to withdraw far more than 4% of their savings for several years or more.

Henry- that’s a broad statement. Just because your family experience was positive doesn’t mean everyone’s is. My guess is you don’t work in health care. Frankly, health insurance has many exclusions that would bankrupt many frugal early retirees.

I have gained a ton from MMM and the FIRE movement, but I’m tired of the ableism- sick people cannot always go back to work- and the ignorance regarding disability and illness that pervades the movement. Eating well and exercising can’t prevent all, or even most, healthcare costs- they delay them at best.

I also work in healthcare and see those devastating expenses everyday in my work too. I have the answer and am working on a blog to describe the process required to get free government healthcare under the affordable care act and will publish it in the spring. I’m tired of seeing people lose their entire life savings in a few months.. and when I say free, I mean free(thanks to the tax payer) No premiums, and no co pay and no out of pocket expenses.

That would be great! I’m so glad that someone else realizes this is a huge problem- I feel like a voice in the wilderness here. I’m delighted that you are figuring out a solution, also, since staying below the Medicaid cutoff is pretty difficult and austere.

Would you be able to provide a link to your blog?

JimDecember 6, 2018, 4:02 pm

Yes. It’s not up but I have reserved the domain and will publish in the spring. It’s called fromheroestozeroes.com. I came up with the name since my wife and I both currently work full time in healthcare (therapy) and since we will both be reducing down to part time after we teach fi which should happen in about 3 years.

PJApril 22, 2019, 7:40 pm

Jim, would love to connect (therapist in FI mode here too!)

VinceDecember 1, 2018, 10:36 am

So is the free (thanks to the taxpayer) also free for the taxpayer?

JimDecember 6, 2018, 4:05 pm

Yes. (Although it truly isn’t free since it’s funded by the taxpayer). However the benefits of the program far outweigh any taxes you ever pay into the program. Plus the biggie here is you cannot go bankrupt due to medical bills, which I’ve seen happen too much in my career.

LauraSeptember 24, 2019, 11:30 am

Are you still going to do your article? As of today my browser said Server cannot be found.

LindseyNovember 30, 2018, 6:22 pm

I have been there. Husband got cancer, 5 surgeries and nearly a year in the hospital total. 28 years old. We nearly went bankrupt. Built up savings again, then I had heart surgery for an undetected heart defect, found at 30. Again, almost 250,000 after health insurance. Built up savings. 15 years later, I got cancer…still trying to recover from that. We managed to save our house, but just. And I can no longer work due to the toll the treatment took; I am in a wheelchair. We maxed out the million dollar coverage on two different employer policies and now my husband cannot work for non-profits that are small because of the amount it would raise their premiums to cover him/us. It is very depressing.

Well it’s a great thing that the Affordable Care Act got rid of lifetime maximum benefits on health insurance policies. Of course the conservatives will just complain about how provisions like this made their premiums go up and they are healthy so they shouldn’t have to pay more.

JoshDecember 1, 2018, 5:05 am

The point is if you get a major medical issue like the one you describe you are screwed whether you decided to pursue FIRE or not. Using your logic you could preach to everyone that working a corporate job doesn’t work because you could get $250k in medical bills not covered by insurance. Now you are too sick to work. I’d still rather be the FIRE guy with a huge nest egg and no debt when the problem started.

This. I have so much empathy for people struck by these situations. But I continually am confused as to why it’s a criticism of FIRE. These situations are not solved by following a traditional path to retirement. Are we saying that the only path to follow us to remain employed into our 90’s “just in case”??? Being employed in a traditional job doesn’t solve these situations

Florida MikeDecember 3, 2018, 2:59 pm

I have to agree, Josh as every job I have ever had would fire me the minute I got sick or hurt. Sure I could sue them for doing that but in the meantime, I would be out of a job and uninsured and waiting years for the case to make it through the legal system!

DavidDecember 2, 2018, 3:42 pm

The catastrophic events you mention, getting cancer or hit by a bus, would be covered by health insurance. If those things happened you would probably have to pay your full $5k or $10k deductible for the year but that would not be a catastrophic expense if you have $800k saved. The other scenario you mention, a parent needing care, seems to be more easily handled by an early retiree that would have much more time to dedicate to caring for the parent than someone who must work full time to survive. This would mean less need to hire expensive care. My grandma had dementia and was cared for in my parents’ home for the last two years of her life. When she first had a heart attack and we thought she would pass quickly we did have hospice come in twice a week but we eventually stopped that even though we didn’t have to because we could take care of her just fine on our own. My mom only worked part time and my uncle or I stayed with my grandma when my mom was at work. Just because a family member has dementia does not mean you automatically have to put them in a care home and pay $8k a month.

snowcanyon, my wife also works in healthcare so I hear about some of the crazy things that happen. My response to this regarding FI is that for every person you see with a catastrophic health event there are probably 5 million people without a catastrophic event. I think because you work in the field you are seeing the worst there is, when in reality those situations are really few and far between the general population.
I think it is a good point to bring up and know how you are going to deal with that situation in the unlikely event it happens to you. But if it happens when you are employed or retired the end result could be the exact same… death or financial ruin.

Adopting a low cost lifestyle will certainly make it easier to save and let those savings last longer. And you can live on very little money, just ask any homeless person or the voluntarily poor who work at places like Dorothy Day houses. In fact, you don’t really need to save any money at all if you keep your lifestyle simple enough.

Ummm…sick people often have a very difficult time to go back to work. There are many conditions with large, ongoing out of pocket expenses. This isn’t about whether a 3% withdrawal rate works, but what happens when people have huge, unexpected expenses that vastly increase their annual withdrawals.

Example: Organ recipients may spend 30k a year on immunosuppressive drugs alone. Kidney failure, is far from a rare condition and is often genetic in origin, not a result of lifestyle. Medicare does not pay for drugs for more than three years post transplant (terrible public policy), so patients may have to foot the bill themselves. Not everyone is eligible for Medicaid, and the majority of state don’t require Medigap policies to be made available to these individuals, so they are stuck with 30k minimum out-of-pocket expenses annually.

Pretty irrelevant in this case whether the 3 or 4 or whatever % rule works, as for most early retirees an extra 30k annually would blast them out of safe withdrawal territory and they would far exceed a 4% withdrawal rate in this scenario. And no, many, many people cannot go back to work for many reasons, medical being the most obvious.

The FIRE movement is great, but the lack of understanding and empathy for those who meet with medical misfortune is galling. I don’t understand why it’s so hard for people to understand this, and the ableist bias verges on the ridiculous, to say the least. Hop on over to the White Coat Investor and you’ll see that docs rarely retire early unless they have a spouse with great insurance, a retirement insurance plan, or a huge outside income. They know what misfortunes can befall people….

if you are concerned about a major medical emergency, try stress testing your retirement plan. Meaning, in your normal course of budgeting cash flow, throw in a huge out lay and see if your plan can survive.

I’m just offering up food for thought even though it’s already been said. If you’re 50 and FI but still working the 9-5 gig and catastrophe hits, what is your plan? You can’t work. You have to figure out how to live off what you have right? How is that any different than being 35 and FIRE when it happens? Or FIRE at 35, but it hits at 50 (apples to apples).
Your nest egg might be smaller with 15 less years of working, but when is enough going to be enough? How big of a catastrophe are you going to plan for?

These are personal questions. That is why it’s called PERSONAL finance. Build your buffer and build your safety nets. But remember you only get one shot at life and no one gets written into the history books for “being a great cubical employee.” Find the balance that works for you, and above all be flexible if/when possible.

Dave, the care of a parent is very topical issue for me. Just six weeks ago, my girlfriend started taking care of her mother, who is having severe memory issues. Had we *not* been well positioned with F.I.R.E, and instead had each been working 40 hours a week with debts to carry, we would have been hard pressed to care for her mother. Because we are living a F.I.R.E lifestyle, my girlfriend has been staying at her mother’s home each day, and my girlfriend’s sister (who works but lives with the mother) has been staying with there for her mother overnight. We have the advantage of delaying professional care until it is absolutely necessary, so thank God we chose to retire early a few years ago.

This is a good example of an often overlooked reason to reach FIRE sooner than later. I think as you get older these situations are more likely to start happening. Its almost impossible to maintain a high level demanding job and take off all the time to care for someone. Or you have to pay for professional care, and that is very expensive. Health related issues could happen to anyone in your family including yourself. You don’t want to be in a position where you are living paycheck to paycheck and cant back out of working for financial reasons.

Between the two of you, the comments section just got a lot of star power!
MMM, I’m a financial idiot just now awaking from my debt coma and living like my hair’s on fire, etc… I was able to check out Collins’ book thanks to a free subscription to Kindle Unlimited so I can read it here abroad, but I was wondering: is it good to research investing while I’m still in debt, as motivation, or should I just research debt paydown?

In the past, I’ve had some success (met you as Ali and Joe’s friend in Vegas), but my brain was still too small to believe in FIRE at the time. I used your tools to pay down debt but lost steam. I am thinking it would be helpful to start out this time with the “big picture,” since I remember you saying that in context, debt is actually pretty small. What do you (or other readers) think?

If you have 2.5x your annual, after tax income in debt (or more), it will take you a long time to pay it off. So starting an investment plan would be in your favor. You should take advantage of compound interest and dollar cost averaging in the stock market.

If you have 1x your annual, after tax income in debt (or less), you most likely can handle a short payoff horizon. In which case, I would suggest putting everything you can towards paying off the debt as soon as possible. As long as it takes you 2 years or less to get it all completely gone. As long as you are planning to work for a decade or more, I don’t see 2 years without retirement savings having a major impact on your final portfolio.

That in between area is debatable. It all depends on your savings rate, spending priorities, and plans for the long and short term.

Either way, educating yourself on any topic in finances is awesome no matter what position you are in.

Thank you for this! (Sorry for the delay; Internet is inconsistent in China & I forgot to check back, too. Good news is, I’ve had a lot of time to read books in the interim and think!)

Since I should be able to clear the worst of the debt (consumer) by this time next year (!), and it’s less than my after-tax income, I’ll throw everything at it in 2019. Then, since my remaining debt is over an additional year’s income AND is at interest rates under 7%, I think I’ll start investing at that point.

I’m 33 and single, so I should easily be able to work 10+ years. My goal is FI at 45.

Jim,
I saw the book up there and was all excited- I bought the book a few months ago, and loved it. Read your entire stock market series, and have been trying to get my cousin (who keeps asking me financial advise) to read it. She’s not much of a reader, so it’s been like pulling teeth. I like your story about the “mr. can’t miss” letter scam.

I FIREd at 49 with $600,000 USD and a paid for home and car. Being a dual US/Canada citizen, I moved to Canada for health insurance reasons. I withdraw from my IRA $27,000 USD per year and pay the 10% penalty (because I didn’t learn about the concept of FIRE until very late in my career and have no taxable account) but it doesn’t matter because that 10% just covers the higher taxes I pay in Canada. I’ve been doing this for 3 years and the balance in my IRA is still $600,000. My portfolio is 50% Vanguard Total Stock Market and 50% in a CD ladder. In the event of a crash, I will spend the CD money, but so far I have only sold stocks as the market has been good. I am happy not working and don’t plan to work again, although I may feel differently in the future. So far, so good.

I live in the PNW and visit Canada typically 2 to 3 times a year. I LOVE your country and to me one of life’s great mysteries is why would MMM choose to live in the US if he was born Canadian? (haha)

Unless I am missing something I cannot figure out a way to move to Canada without marrying a Canadian. I’m too old to apply for a seasonal job visa, I don’t have a desirable enough skill set (doc, engineer, lawyer, etc) and I am not rich enough to “buy” my way in. Is there a way I am not considering?

I love the US and would miss some aspects of it, but it has become tremendously politically distasteful to me and the fact that as a nation we treat our poor so horribly (wealth gap, no universal health care, lack of safety nets) has created a strong desire to head north to a country that looks like, at least to the outside, it values its people more. We’ll see what happens in 2020, however my cynicism is taking root and it makes me dislike myself. For now I’ll stay hunkered down, keep running and live well below my means while still enjoying life with my family and friends.

Henry – My biggest secret to avoiding those problems you mentioned about the US is simply not reading the political news!

I still know what is happening and I am doing my best to improve the country, from the position of most advantage: as a relatively wealthy person who also has the good fortune of having the attention of a good number of online readers.

The US is a WONDERFUL place to be a rich person – better than Canada in many ways including money, business, geography and weather. So my own personal life is great here. But if my goal is to help reduce the corruption and inefficiency that handicap this country (and by extension affect the rest of the world), this is also a good place to live.

Since working on social change is enjoyable hobby, I’d rather hang out here in the US and do that, rather than live in the more socially advanced country of Canada and have less to work on :-)

A very pragmatic post. Fun to see Collins chiming in. I thought he retired from being retired, he’s been so scarce these days!
Regarding your comment, it’s interesting to hear about people who want to leave the U.S. and move to Canada.
I fantasize about the opposite.
I’m actually on the road right now (holed up in a Holiday Inn in St. Louis, MO )on the way back from a month’s “vacation” (I’m retired) in Arizona.
I researched housing costs in the Greater Phoenix Area, and was astounded to find out how much further my money would go down here than in the Toronto area (where I live).
I then checked the housing prices in another half-dozen desirable bedroom communities (near larger cities, safe, good weather, etc.), and figured out how much further ahead I would be financially (compared to Toronto), have year round good weather, and be close to areas that have the stuff I love to do (hike, ski, bike, and ride motorcycles).
The U.S. provides myriad more opportunities, both financially and recreationally, especially if you have a few bucks (i.e., FIRE).
So, I wonder if it’s just a case of thinking the grass is greener on the other side of the fence.
All I know, is that I’ll be back down here in 10 weeks for a month of skiing in Colorado.
In the meantime, I have another 12-13 hours of driving tomorrow until I’m back home in Toronto (that overcrowded, super-overpriced-housing-market, freezing-in-winter, stinking-hot-and-humid-in-summer, traffic nightmare city).
Hmmmm…maybe the grass IS greener on the other side!

Interesting thread about living/travelling in Canada vs. U.S. Just returned from a month in Arizona, although my preference is at altitude in Tucson. And I fly as the driving would drive me nuts. The month before that I spent in California. So all in all, I sure like the states…. lots to do and see… and the groceries are cheaper. But I have to say, getting back to Canada is always a treat as it’s home. Next stop, Australia. I’m a snowbird with 6 months in Canada, and 6 months in warmer places for 4 years now. Don’t see that changing any time soon. Tough to find a partner who might wish to share the snowbird way of life.. but them’s the brakes. And I’m renter, not a buyer. As there’s so many places to see and stay.

Hey,
I love Tucson as well. Like you, I enjoy mixing it up – one time in Arizona, another in California, another in Colorado – it’s like an all you can eat buffet of amazingness!
Australia is great (I did 2 months there and a month in New Zealand). Take time to get into the culture, and go everywhere, including the outback.
Anyway, it still amazes me how much we get totally RIPPED OFF as Canadians in terms of taxation, housing costs, grocery costs, consumer goods, flight costs,gas prices, etc.
Yes, it’s always nice to come home (just because it’s “home”), but that is a psychological effect.
You can make your ‘home” anywhere you choose to, if that is your goal.
I live in Canada because I was too stupid and lazy to figure out earlier in my life (the way MMM did) that if you are intelligent, have income earning potential, and are a saver and investor, the opportunities for a more financially lucrative and interesting life experience in general are in the U.S.A.
Politics notwithstanding.
Like MMM, I learned to tune out the noise and live my own life.
Happy travels and wanderings!

Yeah, it would be cool to be able to test drive living and working in many different countries.
For us, the comparison has been between Germany and the US. I’m American and my wife is German. Our son has both passports. We moved back to Germany in 2011, thinking the grass was greener over there: infinite engineering jobs in southern Germany, university paid for (through high taxes of course) and health insurance for all.
While there were many pluses to living there and we did like the health care on the whole (my wife had a major surgery that went very well and cost us a grand total of $100), ultimately we were homesick for the USA and decided to move back in 2013.
The very high cost of real estate combined with high taxes and population density where deciding factors.
Warts and all (and there are a ton of them … especially now) it’s hard to beat the USA. Especially, so long as one is young, dynamic and healthy.

MarkDecember 8, 2018, 10:48 pm

I really have to agree with MMM here. Wherever you live, politics doesn’t have to affect you because it only exists on TV.

I think a lot of people think Canada takes better care of its needy citizens but that is not true in Ontario. My husband’s family lives in Ontario and his younger brother is disabled. He lives in a subsidized shared apartment and only gets $250 a month to cover all food and necessities like soap, laundry detergent, toilet paper, etc. Food is way more expensive in Canada than in the U.S. and my brother-in-law doesn’t have enough money. The local Ontario food pantries also severely limit how often one can get food to 4-5 times a year. Here in the U.S., we know people who get food weekly from local food pantries. We found out from family that our brother-in-law was going to the local McDonalds to get food out of the garbage. After hearing about that, we now send him an extra $125 a month so he isn’t hungry and can buy toilet paper and the like with the help of a trusted family member who takes him to the store and pays with the money we send. Our son has cerebral palsy and gets way more help financially through SSI here in the U.S. along with another adopted son’s birth mom who gets SSI for a disability and has lived in subsidized housing. Ontario Canada is doing a terrible job of taking care of my brother-in-law who has a severe mental disability. I often hear people from the U.S. talking about how much better Canada takes care of it’s needy citizens and we just don’t see that happening.

Amy, That is heartbreaking to read. We do have our issues here in the US..and assume the grass is greener. Up until recently Canada has discriminated against immigration applicants with disabilities as they’ve considered them to be a burden and inadmissible. I’ve read changes have been made. Hoping they improve the quality of life for the citizens like your BIL as well. Your BIL is lucky to have you!

I just wanted to add that the advise to start receiving dividends is highly country specific. For example in Finland that is terrible advice. Say the funds pay a yearly dividend of 2% and rise in value 3% (i.e. if no dividends are payed the funds rise 5% in a year). If you own 500,000€ of the funds and need 10,000€ you can:

a) Take the dividends: 0.02*500,000€=10,000€. Then that is capital income and you pay 30% tax, meaning 3,000€.
b) Sell shares for €10,000. Since the shares have gone up 5%, only 476€ of that is actual profits, and therefore taxable income. You pay only 0.3*476€=143€ in capital income tax.

So the difference between getting €10,000 in dividends vs. selling shares can mean a difference of 2,857€ when it comes time to pay taxes.

This, obviously, assumes that you bought the shares only a year ago. If they are old shares then the profit is probably higher than 5%. Still, since you didn’t get the shares for nothing, you can never do worse than all of it being counted as capital income, which is the case if you get dividends. If you sell shares that have doubled in value since you bought them you will still save 1,500€ on your tax bill.

This is probably not true for the US, but I think you have a lot of international readers. Therefore I think it’s a point to worth bringing up.

So, are you saying that dividends are ALWAYS taxed at 30% in Finland, even if you are living with zero employment income and only 10,000€ per year in dividends?

If so, it’s quite an anti-retirement tax code. I might shift strategies entirely and perhaps own a rental house or a small business that pays me as an employee instead. Or of course, just save more initially to allow for the tax expense. Or move, or live off of public assistance or in the barter economy :-)

You are right – government policies definitely affect retirement strategy.

Yes, unless you have capital losses to balance them out. Salary+benefits are taxed separately from capital gains and dividends. So even if you have no other income, 10€ in dividends gets you a 3€ tax bill.

This just makes it inefficient to own stocks directly or to own funds that pay the dividends yearly. If the dividends are paid into the fund, then it is not taxed and you only pay tax on the actual gain when you sell. This makes fund a viable options, since you also don’t have to use the FIFO (first in first out) principle when selling shares of the fund. This enables you to always sell those shares that have not gained as much in value, or even get some capital loss on paper (even though they are all the same shares of the same fund).

Real estate is definitely an option, although rental income is also counted as capital income. The moving strategy is quite viable, since you can always change your mind; if you move to a country with cheaper living expenses (but no proper health care) and e.g. get cancer, you can always move back to Finland. You will be instantly covered by the universal health care regardless of any pre-existing conditions and get treatment.

So not necessary “save more”, but “save differently”. Then there are many aspects that we don’t have to worry about in Finland:

– Everyone that works earns a pension that is approximately 60% of their income (assuming full working career) when they retire at 63-68.
– Even if you haven’t worked a day in your life you are guaranteed about 700€/month in a guaranteed pension.
– If you have a small income you can get housing allowance to cover a part of the rent (only income affects the amount, not assets).
– If you own a house the property tax is usually low, making it cheap if you have it paid off.
– Even if you don’t, the interests on mortgages are at about 0.6-1% at the moment.
– University education is free.
– We have universal health care, so no reason to worry about health insurance.
– We have government sponsored elderly care, so you are covered if you live super long.
– etc. etc.

So very different beasts. I know you can’t consider how things are done in other countries (nor is that expected). Just my two cents on how the “no brainer” strategy might differ if the laws and circumstances are different.

I found your thoughts on Finland very interesting around higher taxes, but higher social support too.

South Africa has a similarly poor treatment of dividends, we get taxed at 20% of dividend income regardless of your income level. Capital gains are taxed based on marginal tax rates so again it would be better to sell than to receive dividends if you’re not working.

Unfortunately on our side, we’re taxed highly, but get no social benefits, no pension, no healthcare, and old age grant of <$1k per annum if you have little to no assets. So don't expect any benefit at all for the high taxes. I think moving countries would be an important consideration should they continue to increase taxes.

Since for every negative there needs to be a least 1 positive, we have incredibly cheap housing, very high interest rates (so living off interest) becomes an option. As long as you are careful with how you structure it, you can get 10% interest, versus 5-6% inflation, but pay tax at marginal rates. If you're not earning much, then you can get your taxes below the 20% rate and make real returns on interest.

Still think I might make a move to a lower tax, more business friendly and better functioning place at some point now that we're well into FI.

Mate, you’re dreaming if you believe you’ll get that 60% retirement once you hit the number in Finland. No offence, but it’s just not going to happen. The pension funds are already being drained more than they’re receiving in payments and the amount of recipients is increasing contra the number of those contributing.
Realising this is a Ponzi scheme made us to bail out from Finland and move as far as we could (to Australia). It’s quite a bit better here; no VAT/GST on fresh food (compared to the 20%+ in Finland), and all income is pooled so there’s no difference whether it comes from dividends or work – and the tax brackets are favourable for modest FIRE life. Not to mention the balmy weather makes life so much cheaper in general (less heating, less layers of clothing, less wear on vehicle etc etc). Prefer it here.

It would be interesting to gain an overview of what the various income tax/dividend tax/capital gains tax/interest/social benefits/health insurance etc. situations are considering a number of, let’s say, suitable FI countries. Where would it ultimately be best to benefit most from geo-arbitrage in order to allow those $, £, € last longest in view of differing life situations.

In Sweden, it works pretty much as described for Finland, except that we can hold stocks in an ISK account where dividends are not taxed at all provided they are moved to a checking account within the quarter year. So that is a plus for the dividend strategy.

My FI formula is something like this. 4 single fam rentals that cashflow ~$2500/mo. ($900/ mo. more after each gets paid off), $350k in retirement accounts, $250k in brokerage, side-hustles that bring in ~$2000 a month. Diverse and antifragile streams, and even if we don’t touch our stocks, we still have $4500/mo with very little effort. After we pay off rentals, that’s more than $8000 a month with a total net worth > $2 mm….this should be more than enough. We in in year 6.5 of this 10 year plan, can’t wait.

Excellent article, MMM! I love how you make a complex, widely debated topic sound so very simple. One wrinkle in the 4% rule is that MOST INVESTORS DO NOT ACHIEVE THE RATE OF RETURN NEEDED TO MAINTAIN IT….of course, reading Collins book and staying the course in index funds weighted heavily towards stocks will likely do it. Most investors do not stay the course. See Dalbar study done annually, reports how much investors lag mutual funds https://blogs.wsj.com/moneybeat/2017/03/31/study-investors-fall-short-yet-again/. Conclusion almost every time is that if investors would stay invested, they would do fine. Unfortunately, most do not. Someone needs to invent the seatbelt that keeps you in your investments or the pill that makes us have the Buffett or Bogle temperament. People are usually very swayed by stuff like “what happens when so and so gets elected”, or “what about Bitcoin”, or “what about all this cash that I have piled up”….everyone knows someone who is still waiting to get back into the stock market since 2008. I’m not going to go Suze Orman on you, but the stats are real that people have a hard time staying invested fully in funds, even index funds. I pray that the FIRE community defies these stats. And, of course, if they have contingencies like side gigs, social security, rental real estate, aunt’s inheritance, etc…they will probably still make it.

Ha! I had an investment sales guy call me around 2010 to offer me investment advice. I told him I was doing fine thanks, no help needed. He asked me, What did you do in the crash? And I told him, I bought all the way down, stocks were on sale! Then I kept buying all the way back up! He acknowledged I probably didn’t need his hand-holding and hung up.

What is important is to understand about % returns vs. $ returns on invested capital. This topic is complicated by the movement of cash in and out of a stock or fund over time, as well as how dividends are treated (reinvested or taken as cash).

Take for instance, cost basis is defined as an adjustable cost that reflects original purchase price of each tax lot, as well as reinvested dividends. If a stock goes up 10% in a year, and you received four dividend payments that were reinvested in additional shares, the cost basis will rise as the reinvestment buys shares with a higher price. This is of course, not new money moving into the holding from a cash account, but is instead a portion of the investor’s return that is generated by the company or fund. You can see how this can create some serious Zombie Data and Junk Science.

My wife stopped adding to investments last year and prioritized the paydown of student debt (finished in four months!). I on the other hand, added to my holdings about 2-6 times per month all year. Guess what? My portfolio returns are half my wife’s over the time series. I bought into a rising and falling market, but she did nothing. I only sold stocks with losses this week in order to harvest losses and rebalance, so there was no jumping around.

I like that you have explained a complex topic here in simple terms but there are good reasons for portfolio diversification that include bonds. In the case of a stock market crash, these financial instruments move in the opposite direction so the appreciation on your bonds gives you a chance to buy stocks “on sale”. A good argument for the “robo-advisors” is that they will do this for you through rebalancing.

You are right Scott – the concept of Asset Allocation and rebalancing can indeed help you benefit from volatility, although the effect is pretty small. I didn’t want to throw people off by getting into that more subtle aspect of investing – I figured that the hands-off people could get those benefits automatically with a Betterment/Robo Advisor account, while the more motivated will read books on the subject and learn it in more detail.

Hey Scott, bonds provide good ballast against stock volatility, but your statement ‘In the case of a stock market crash, these financial instruments move in the opposite direction so the appreciation on your bonds gives you a chance to buy stocks “on sale”.’ didn’t prove true *quite* immediately in the 2008 crash. If you compare Vanguard ETFs VTI to BND in late 2008, they both dropped. BND ~10%, VTI ~45%. Bonds tend to move up and down in much smaller percentages when compared to stocks. That’s the ballast. But, bonds can and do move in the same direction as stocks more often than we let on. I’m highlighting this fact so that we know it’s normal if bonds sink down with stocks during the next market crash or correction.

Now, if you look at the period post-crash in late 2008/early 2009, then you see bonds actually jumped up ~10% to recover very fast, while stocks had continued to sink lower until March 2009, then went on a tear. This is is indeed the bond (fund) appreciation you mentioned, which we can shift over to buy those stocks on sale, specially in a retirement account where selling shares won’t trigger taxes.

You are right, bonds and stocks go up and down together. Bond prices are based on market interest rates. Buy bonds when rates are going down, sell when rates are going up, unless you only care about the interest income and are holding to maturity, in which case you won’t be worrying about market price. You also have to consider higher taxes on interest income than on dividends and capital gains, and timing of the income taxes (annual for interest and dividends versus when you sell for capital gains). Bonds might reduce the volatility but at a cost of increasing net worth. Bonds don’t produce much income when market rates are low, so you have to have a very large amount invested. The interest rate has to cover inflation as well. Stocks automatically cover inflation as the stock prices rise over time. The income/withdrawal rate to provide an annual income from investments does not take into account large expenses (new car, major house repairs, moving costs, other large purchases) unless there is a large margin for that. Eroding captial for these expenses especially early in retirement means the capital won’t last as long due to compounding.

The spreadsheet (and consequently the whole article) assumes cost of living will stay the same without the effects of compounding inflation. I’m sorry this is flat out unrealistic. To be sure I fully understand the 4% rule (which should be called “the 4% assumption” if you ask me). My point is that the simulation could be more realistic by applying the assumed inflation to the living cost line on a yearly basis.

We should keep in mind (at least I do) that the “4% assumption” assumes America will have another fantastic century this time around. There are several reasons to believe it will. There are reasons not to. Watch our Asians friends working/studying/investing harder than we do. They “remind” me of America in the beginning of the XX century. Anyhow, repeating 7% on top of dividends is possible. I’m not ready to bank on it just yet and would advise for anyone contemplating the 4% rule retirement to have a significant safety margin or fall back position.

I’m a former American public school teacher who found the salary in Florida insufficient, so I moved abroad…in fact, I am in one of those very countries you referenced now, earning a much better living so I can return to the States in a few years debt-free and on my way to FIRE.

My point is that, were America to crash and burn, people with options can move abroad. The same skills that got them to FIRE could, and most likely would, leave them in better financial positions than those in the work force waiting to retire at 65, and would also enable them to be successful overseas. Their voracious reading and learning and passion for the numbers would lead people to study the laws in their new homes and make the most informed choices, eventually building their wealth again–especially considering that’s what MMM did himself in moving TO America from Canada.

I know very little about investing, but I do know that the foundation that gets people to early retirement, or financial independence, or whatever they call it, doesn’t vanish just because their portfolios might. At least, I certainly hope not!

Great read, MMM! I always used to get so hung up on the whole “what if I get cancer (insert any other illness here) and need more money? Then I asked myself a very important question…Well, what if you don’t have a money mustache and get cancer right now? Have health insurance through work? What if you’re laid off? You have a car accident…the list of (potential) health concerns can go on and on. If you have a badass money stash, you’ll be WAY more prepared for these (potential) problems. How can anyone argue with MMM here? Plus, you can always work again if you need more money. MMM, keep it up! There will always be the “what if” skeptics.

Seriously though, it’s my job to try to learn from skeptical feedback in order to see if I’m missing anything.

The biggest thing I have learned through blogging so far is that expensive/chronic health issues are more common than I would have guessed, and they come up randomly in otherwise healthy people. So I have tried to become more sensitive about health and not just assume it’s 100% in our control. (Although I still maintain it’s at least 75% in our control!)

As one of those who unexpectedly suffered a debilitating spine injury, and many years with out of pocket medical expenditures of $30k+ (including premiums), I want to implore others to ensure they have good long term disability coverage. And to understand the different types of coverage. I’ve had more than 8 or 9 spine surgeries (I’ve honestly lost count) and am not physically able to work my former six figure job. LTD benefits can be the difference between lots of uncomfortable budget slashing and financial ruin.

MMM – I am an enthusiastic follower of your blog, (from New Zealand) and have been frugal all my life – I hate shopping and mindless consumption. I have also been fit and healthy and have previously been scathing of those who have develop health issues -bad diet! no exercise! drugs! too much booze!. However, in April this year at 55, I was diagnosed with Stage 2 breast cancer . I have had surgery and am now going through chemotherapy. This will be followed by radiotherapy, then hormone treatment. To say that this has thrown me is an understatement – the shock of diagnosis, then the assault of chemo which has left me functioning at 10% capacity at worst, 60% at best, has derailed my previously active life.

I am very grateful for living in New Zealand where healthcare is free, and for being frugal, which means that my partner and I don’t have any money worries as we have accumulated a nest egg, an investment property and have a paid off house. We are also contributing to our Kiwisaver accounts(retirement investment funds) that we can’t access until we are 65. We can ride this out also because our living expenses are low and our mindsets are geared towards frugality. Being frugal does give you choices at times like this, and I have left my job as a preschool teacher, with the option of doing day to day relieving around treatments when I feel well enough.

I would urge those of you who are young, considering FIRE and are living in countries where your healthcare is not paid for to cover yourselves well for chronic illnesses and disability. When you are young, fit and healthy you feel bulletproof. We all die eventually and I would bet that most of us linger at it – we don’t conveniently keel over straight away with a heart attack or stroke. My partner is the same age as me and has been in physical work all his life and played sport for years. He has already had knee surgery, plus he has (inherited) arthritis developing. I can see that at some stage his mobility will be seriously affected.

Look around you everyone – notice the old, the ill, the disabled. They were once like you. Check out your family history – what do people die of?
Save, invest, live life well, but keep your eyes wide open. Plan for death, and the decline and setbacks that comes before this – sometimes many years before you actually do die.

Kandice, couldn’t agree more. If we’re all striving for FIRE and talking about health insurance prior to Medicare eligibility, there’s a huuuuuuge gap out there for two types of insurance coverage. One is what you mentioned; long-term disability. The stuff you get at work usually isn’t convertible when you quit – if it is, then you absolutely should keep it or buy it on the open market before you quit. Second is long-term care. I haven’t seen ANY FIRE proponents talk about this aspect of planning – if we’re all so well off we can retire, your 4% or 3% spend rate goes flying out of the window if you or your spouse needs long-term care, either at home or in a facility. Medicare doesn’t cover it. Medicaid does – but you essentially have to spend down all of your assets in order to get benefits.
My bottom line here is there are two very important but oft-overlooked pieces of insurance that aren’t sexy to talk about BESIDES ACA/individual health insurance when retiring early (or really, ever) that need to be a careful part of your FIRE planning. Not fun to talk about but it’s there.

My elderly mom was living on her own in her paid for house. She has a modest pension, S.S. and a small nest egg. She fell and broke her hip. She would not follow the safety precautions during rehabilitation. She was diagnosed then with Dementia. Social worker said she needed to go to a home or have caregiver 24’s a day. Neither one was financial feasible. So for the last 6 years she has lived with us. A nurse told me 6 years ago transfer your mom’s house to your name. She will outlive her resources and you will lose her house. Has anyone done this to preserve a house or land? It is too late for us, but wondered if it might help someone else?

My parents have had different scenarios with their parents, and my mom’s dad was the easiest. In his 70’s he noticed he was making poor decisions with his money and he insisted on adding my mom (his only child) as a co-signer on his bank account and added her name to the house. So much easier. No fighting with the government to use his money to care for him.

My parents are planning pretty much the same thing, with the addition of a trust fund (with us four siblings having different responsibilities).

Glad you have been blessed with good health, and I hope it continues. A healthy lifestyle is definitely important to live a long and productive life. It doesn’t, however, decrease health costs on average. Smokers, for example, die earlier, giving the lower total lifetime health costs.

So, in the 40k example above, what’s s person to do when he finds himself in need of twenty-fourhour, hell even twelve hour a day nursing care, no disability insurance, and obviously too I’ll to return to work? What’s the plan for the two, or five, or ten, or twenty-five (to use your numbers) percent of people this happens to? What’s the road map?

Hey MMM,
Dear god!!! Every single day of my life I want to pull the plug and retire… I’m 43… I live in Toronto ….
I own some VUS etf. (Canadian version of vti)
In my rrsp.
If I sell my house 1 million. Do I just buy VUS all at one at current value and then proceed with model? Also. How do you set up auto withdrawals ?? I’m assuming I would need to manually sell shares each month for the income??
also have to account for the tax man too right….
Man, I’m dying to do this. Just have no help or guidance here….do you have any Canadian resources or suggestions to help execute this?

Whether you lump-sum invest in VUS (all in one go) or dollar-cost average (decide to invest 25% every quarter for the next year to spread the risk), no one can really say which one will be “optimal”, but choose one and don’t let yourself be paralyzed by uncertainty.

Call your bank/brokerage and check if they have a way to auto-withdraw, since this is probably going to be different for different institutions. Alternatively (or if impossible), you could always just manually sell shares every month/or two/or three.

You are going to have very minimal taxes, depending on your province, and desired level of spending. Since you mentioned 1M, I will assume you are going to live on 40K. A large portion of that will be from sale of stocks, so your tax liability will come from capital gains (and dividends to a small degree). 50% of the difference between the selling price of VUS and what you purchased it at will count as income – and at the beginning that’s going to be very small (say you buy VUS at 50$ and sell at 60$ a year later, only 5$ will be “taxable income”) Odds are, you will be in the bottom tax bracket, and your minimum federal/provincial amount will shield most of that too.

Thanks so much for the reply Alex!
Wow if that’s all the tax then that’s great I guess
The thing that’s stinks is if I sell my house where do I live?
40k per annum in Toronto (mind you I’m 20-30 mins north of Toronto) but same shite as far as cost of living as far as rent goes.
It would prob cost me approx 2000-2200 to rent a small plac for my wife child and I. Can 40 k do it?
I own three rentals town houses all together generate approx 1k per month cash flow after all expenses. So I can add that to income. But still it just doesn’t seem enough around here in the greater Toronto area, or am i delusional ?52k per year… wife raising child doesn’t work.

You no longer need to live where you live now if you no longer need to be close to a job you no longer have. You could live somewhere lovely, and cheaper, or even in one of your rental units. Where you need to be is very different once you FIRE.

Hey Nicola. Thanks for the reply. Yeah I get it…. I know I can move, however, I have a 2 year old…3 soon, and she is the only child so she has some cousins in Toronto and my parents whom are older are near by. So I’d hate to move too far away and remove my daughter from her grandparents and aunt cousins etc… and if I move somewhat away, rents are still kinda high. So That’s the dilllema… but I agree. I can pack up and move to Nova Scotia and have a place for 1000mth. But we would have no extended family near by. I do value that so it’s just hard….

You don’t need to leave the province or even move much more than a manageable distance/ whatever meets your values to benefit from a non-Vancouver/Toronto ridiculous cost of living. Remember too, you’ll be FIRE, so visiting family in TO could be easier even that it is now, despite a larger distance, given more time availability. Just some thoughts…

I think ‘having family nearby’ seems to mean very different things to different people. For me when I say several of my family members live ‘nearby’ I mean I can walk or ride my bike there. It means someone can text and say ‘hey, wanna come over make dinner together in half an hour?’ or ‘hey, something came up, can you babysit for a couple of hours tonight?’ or ‘I’m sick, can someone bring me some soup?’ It means an older kid can drop by on their own, it means you can take your nieces or nephews somewhere for a couple hours on a Saturday and drop them back home and still have your morning and evening free as usual.

A two or three hour drive in a car is not ‘having family nearby’ for a lot of people!

AndrewDecember 7, 2018, 2:05 am

Hi David,

I found that having shares of VUS (or VUN, the version that’s not hedged… or any TSX listed ETF that holds US stocks) in your RRSP doesn’t seem to let you avoid the 15% clawback of distributions that VTI does in your RRSP. Therefore, you lose 15% of your dividends even though you are owning the same companies. For background, in case you didn’t know, the US and Canada have a deal that owning US stocks in your RRSP saves 15% of tax that the US charges foreign investors for distributions.

I did the math for myself a couple of years ago and found the US tax savings more than made up for the cost of buying into VTI shares (especially when using “Norbert’s Gambit” to buy the US$).

I couldn’t find anything in the Vanguard literature that discussed this, but the distributions on VUN are roughly 15% less than VTI, and VUS or VUN distributions are the same in my non- sheltered account. VTI shares in my non-sheltered account show a “non-resident tax” clawback for every distribution.

That 15% could cost you about $2,500 to $3k per year on your $1M, without you even seeing a word about it anywhere.

Has anybody else done any research on this? I’d love to hear if there’s any consensus on it. I feel there’s not a lot of information circulating on Canadian FIRE tax implications.

Yup, you’ve got it Mary – almost nobody cares about your assets (although Medicaid and certain university aid programs do) – although someone please correct me if I am wrong because I have never collected healthcare subsidies due to high income since the program started.

For the same reason, it is difficult for a retired millionaire to get a mortgage on a $200,000 house – because they are looking for income rather than assets. It’s just so rare for anyone to have any savings, it is not part of most programs.

Pete, Medicaid here in California is not means-tested. MAGI only. A lot of early retirees will qualify for it, even when they might not want it. Our experience with it has been very positive, even though we initially tried to talk the county out of moving us onto it from ACA, which had been ok with paying for.

Medicaid, unlike other forms of public assistance, does not look at assets, only income. Unfortunately, their system appears to be designed for people on disability, court-ordered settlements, etc. They struggle to understand dividends, self-employment, or really anything that does not pay out a predictable amount every two weeks to a month.

If your FIRE income places you within the Medicaid limits, and you opt for it, expect to have some surreal conversations with a person who doesn’t really know what “capital gains” means.

In the state of Maine, assets do affect Medicaid eligibility for adults but not children. That means that if you have high assets and low income, your children will qualify for Medicaid but the parents will not. That may be changing soon though because we just elected a new governor who wants to get more people on the Medicaid rolls.

Medicaid is a federal/state program so rules/qualifications vary state by state. In TX they scrutinized assets, of which there were none by the time we needed 24-hr care for my 93 yr old mother w/ dementia. She lived with me for several years, however once the wandering began we couldn’t take a chance of leaving her at home and it wasn’t feasible for me to quit my job to become a full-time caregiver.

We supplemented her SS and the VA’s Aide and Attendance Benefit to cover assisted living for 6 yrs. We managed her cash assets well, but once a person needs dementia care it’s like a fire hose opens. Keep in mind, Medicare DOES NOT help with long-term care. After 6 yrs we needed to move her to a nursing home due to decline in her cognitive abilities. She moved from a memory care wing in assisted living that was $3,100/month to a nursing home where private pay was $5000/mo. We started the Medicaid application process a month before the move and she was approved almost 3 months later (with costs from date of application refunded.)

It’s hell to go through, but moral of the story is plan for long term care whether through FI or LT care insurance. And don’t make mistake of thinking it’s only the elderly that get dementia. Before my mom died, a 61 yr old woman moved in who had slipped down a flight of stairs and had a head injury resulting in frontal lobe dementia. We need to take care of ourselves, live without dwelling on catastrophe, but plan for the future.

You are correct. Obamacare (ACA) only cares about income. We keep our income above Medicaid level (couldn’t justify it to myself, since our assets are more than adequate), but low enough for subsidies (although I still feel guilty). We were paying $18/month for a bronze plan (HDHP) for 2018; will be about $9 for 2019.

Feels wrong to me, but when you’re following the rules as they were set up, seems silly to pay an additional nearly $2,000 per month for insurance!

BTW, totally cool to be able to put money into HSA,. Have no intention of using it until we’re REALLY old ;-)

MMM, I am assuming that the $40k includes taxes? Though I suppose if you are living off your taxable investment portfolio, and you do a FIFO withdrawal, the tax rate could conceivably be 0% (iffen the tax laws don’t get changed AGAIN on us).
I’m also planning on getting long term care insurance when I get up there in years, and keep disability insurance, in case something catastrophic happens where I live but can’t take care of myself. I’m not sure if disability would at that point = long term care or not. If so, then I’ll just have long term care insurance.
And if your home has appreciated substantially, and you sell it, you could just use half of the proceeds to buy another house somewhere cheaper/geoarbitrage, and invest the remainder. Especially if the home is already paid off. (FYI, my parents have a paid off home that has appreciated to about $900k-$1 mil depending on the market. They paid $100k originally, so will likely have to pay some capital gains tax if they ever sell.) You probably are aware of that already, but probably kept the post more on the simple side.

No – because that 15% tax rate is not a flat tax, it is the MAXIMUM amount they make you pay on long term capital gains.

If you’re a family living on $40k per year, your tax rate will be extremely low. And if you’re single, you don’t need $40,000 to live a good life. But if you DO insist on spending that much, you are correct – you just have to save a bit more to account for taxes.

I realize this line of thinking is just an extension of trying to be prepared for everything, but…

Planning for divorce *just in case* when everyone is happy is a good way to plant the seeds of divorce. I think everyone would be happier if instead you plan on having enough for you to grow old together.

You may see statistics saying that half of marriages end in divorce; remember that plenty of those divorces are repeat offenders. Think of how many people you know that are on their second, third or even fourth marriage. Factor that in.

I don’t think getting divorced would be much of a concern. If you have kids and split the costs equally for raising them then it would be similar to before. It would probably involve selling the big family home and buying something smaller for each person. If you don’t have kids living as a single person with a paid of small apartment can be incredibly cheap. It would definitely be a bit of a lifestyle change but I don’t see anything that would force either spouse to go back to work if they didn’t want to.

This is a good question Cassie and I am working on a full article on the “economics of divorce” which will also share some of our story.

The quick answer is “No” – since we had a relativlely luxurious and spendy lifestyle while married (especially in the area of expensive housing), we could have easily just each downsized to 50% of that spending level and continued on without having to work. During all these first 13 years of retirement, we never really spent the full amount that our savings/investments were generating anyway.

But, since we have BOTH continued to work occasionally and own businesses and real estate (the blog is just one of these things), we had enough surplus that there was not even any downsizing required. Just an upsizing as I bought the least expensive house nearby as my own separate space. (Which of course I’ll be Airbnb’ing occasionally to make it pay for itself anyway :-))

Toby. The 15% rate you are thinking of does not kick in for married couples until their taxable income exceeds ~$77k. The relevant federal tax rate for this article is 0%. And don’t forget that taxable income is often a significantly smaller number than gross income.

I’m aware that inflation figures here in Australia (and presumably elsewhere) are based on the consumer price index, which is based on a hypothetical ‘basket of goods’ (presumably including services).

Now, as Mustachians are likely to have atypical consumption patterns compared to the average Joe/Jane, would the headline inflation figures be less relevant for a Mustachian?

If gasoline/petrol goes down by 20%, fresh fruit and vegetables goes up by 10% and bicycle parts up by 40%, this may net to a 0% change for typical consumer patterns, but may have a larger impact on the cost of living for Mustachians.

Just food for thought, obviously over the long term this may not matter as it’ll be close to the headline figure long term.

In Canada our government/central bank uses the same system to measure inflation, naturally it’s out of touch with reality.

For example my parents bought a Nissan Micra in 1987 for $10,000 new. Today you can buy a new Nissan Micra for about $10,000, therefore inflation is 0%. Or you can go to the other extreme by comparing costs of pickup trucks and SUVs. Electronics are another good go-to example, computers and laptops have become way cheaper over time while performance is going up.

Basically you’re correct, depending on what goods and services you get you can choose to depend on sectors of the economy that are less affected by inflation. So really the overall average rate of inflation is much less relevant. I find generally that the areas where inflation hits hardest are the least mustachian goods and services.

“Every Financial Advisor (even Betterment!) Seems to Suggest Lots Of Bonds, – Why Does MMM Only Hold Stocks?” Wait — WHAT?! I *just* finished reading “The Intelligent Asset Allocator,” as instructed by a MMM book report. I’ve been 100% stocks for 30 years, but this book has convinced me that I should be at least 25% bonds, and I’ve just given that advice to my kids who are in their 20s. That book explains that by having at least some in bonds (as well as diversifying across small/large and International), then when you rebalance each year, you are in effect forced to “buy low / sell high” even if it doesn’t feel right. Are you disagreeing with that advice, MMM?

From my experience, people hear Stocks/Bonds and think Black/White. But there are multiple shades of gray.

In betterment, even if you are 100% stocks, there are still different types of stocks within that allocation that are riskier than others. the forced “buy low/sell high” still happens within all of stocks. The same goes for bonds, there are t-bills (considered risk free in the finance world) and there are Sears Corp bonds (on paper they are yielding higher returns than average stock market returns, but super risky).

So when you hear “100% stocks”, it is more like (as an example), “20% small cap, 20% large cap, 20% emerging markets, 20% international, 20% biotechs”. If Small cap raises to 25% and large goes to 15%, you would buy more large cap (buying low) and less small cap (selling high) to balance it back out.

I was curious about your calculations in the spreadsheet. It appears that the dividends are being added back into the ending amount, but the dividends were being used to cover expenses correct? Also the appreciation is being calculated at 4% but that was included dividends which were already withdrawn at 1.89%. So the account should have been appreciated at 2.11%? Let me know if i am missing something. This is an amazing post that brings confidence to anyone on the fence of making the leap!! Thanks for everything MMM!

Hey Mr Money Mustache, I have a recurring debate with a friend about the ethics of passive income. He says that it’s largely parasitic economic behavior. I’m undecided on its ethics. I know economics is rarely zero sum, so I’m optimistic that passive income e.g. index fund or real estate investing is a net economic positive for all involved, but am not familiar enough with economics to say either way. What are your thoughts?

That’s a very philosophical question and I definitely see your friend’s point. The ethical argument in favour of investing is that in the best case, you are helping people by lending them money to start and grow their businesses (or to buy homes or any of the things people need capital for). If the terms are fair, it’s possible for it to be a beneficial arrangement for the people you’re loaning money to.

E.g., like two people starting a business together where one person puts in the money/property/equipment and the other person puts in the labour.

Whether that feels like a good arrangement to you is very subjective and personal.

Spend or save, it’s consumption either way. The only difference is what you’re buying. If you spend, you’re buying things today. If you save, you’re buying productive assets to form a future income stream. Those productive assets are going to exist either way (unless we move to hardcore communism in the future), so the only question is how much of them you want to own.

One interesting thing about index investing is it looks a lot like voluntary socialism – with so many companies in an index like VTI, you are effectively buying yourself a slice of the means of production. Except that, since not everyone else is buying (because they must see the 20th installment in the Marvel Cinematic Universe, or else they will surely die), there are extra slices left over. Therefore, you can accumulate a disproportionate share of slices, such that others are working for you more than you work for yourself. Probably frustrating from their perspective (but what a great movie they just saw!). But without the means of production, the jobs wouldn’t exist at all and they’d be subsistence farmers or hunter gatherers. Sure you could improve the system by tweaking it – higher taxes, better health care, etc – but overall this looks like a win-win to me.

It may help to think of investing as trading on the time-value of money. You could spend everything you have right now, but instead you don’t, why not? Because you can invest it for passive income and it accrues value over time. Why does it have to accrue value over time? Because if it didn’t there would be no incentive to invest it. Borrowing can be thought of as investing multiplied by -1 (the exact opposite). You can borrow to get money now that would take you a while to save, it costs you more to have it now than to save it up (in interest). Why does it cost more to have it now? Because you have to incentivize someone to invest it.

Investing eventually yields a passive income stream but you are not getting something for nothing (which would be economically unethical). You are getting something for the time-value of the money you invested in the economy. Basically, the economy rewards you for the liquidity that you were entitled to for all that time but allowed someone else to use, which is a real value to the economy.

The FI community vilifies borrowing, because it is often misused in personal finance, but not all borrowing in the entire economy is bad. Finance has been the special sauce of human development for at least several millenia. Imagine how much slower everything would be progressing go if you had to accumulate a stack of dolla bills (seashells, gold nuggets, MMM’s finger clippings, or whatev’) before you started any project:

-You want to build a factory? Better toil in the dirt for a couple decades, first.
-But as soon as I have the factory I can start paying you back, you can have all your money back in 10 years. I’ll even throw in something called interest so that it’s a win-win for you.
-No deal; lending bad; borrowing bad.
-But I’ll be dead before I can save enough. I guess I better not pursue this project.

Hi, I’m fairly new to investing, but I have a couple of thoughts on this. If I make any errors, please correct me folks.

1. If I lend money that enables someone to run a business, this is a mutually beneficial arrangement. In the best case scenario, they get richer, I get richer, and their customers receive goods or services that they value. I also share the risk – in the worst case scenario, we could both lose our investment. This is different from “usury” where the lender takes advantage of the other person’s desperation to get rich at their expense, with a disproportionately low risk to their own money. However you can minimise the risk by making diverse investments.
2. You can use your investment to help build a world in line with your own values. There are funds available that use ethical characteristics to select investments, or you could invest in some individual companies that you particularly like. These investments may have some other advantages – ethically run companies might be less at risk of punitive regulations (such as carbon taxes or the restrictions on advertising cigarettes) or to labour disputes for example. Ethical investment also provides others with the opportunity to practice “right liveliehood”.
3. The third opportunity to use your investment for good is as a conscious consumer (even if you are a minimal consumer). Spend the money you earn from your investments in a way that helps people and the planet e.g buy organic produce, and donate some money to charity. If you find that you no longer have to work so many hours you will have more time to donate too.

Personally I am comfortable working on the premise that we may spend some of our capital as we become aged. I do not feel the need to die with a million dollars in the bank. It’s a gamble on how long you will live, but I think you can build in a safety margin there too.
My 53yr old husband’ who already had a long term illness’ also developed a brain tumour (non malignant) this year. We had just barista FIRE’d to a lower COL and mortgage free life on an Island, understanding the risks. Even here in Canada, you will burn through money if this happens. He cant work, I couldn’t work for months as I needed to support him. Being sick is expensive, even in Canada even with private healthcare ($350/month), so much is not covered. Things are interesting right now. Given all of this, I wouldn’t change a thing. Living in a beautiful place is helping him heal, we live in a smaller, caring community, our finances will recover as govt and pensions kick in. We have been growing our mustaches for about 8yrs, so glad we started, it really changed how we spent our time and our money and our enjoyment of life.

Ha, if relying on my stash only, without working, will melt me into a whining puddle in front of a television that endlessly blares Fox News, I’d rather go back to work. That sounds like a nightmare FIRE life.

But seriously, THANK you for this article!!
I do live off my stash only and only my stash.
The activities I chose in my FIRED life result in zero income, but lots of gratitude and happiness.

Most hustle opportunities I have come across, have me outraged at the demand on my time/flexibility with very little money/consideration for my needs back in return, so I usually don’t pursue them. Maybe that would be different, had I come across more lucrative ones. I don’t know.

Still, I have been beating myself up, at least for a while, for not having a side hustle or bringing in extra money etc., because that seems to be “more prudent” or gives you that extra safety margin, you mention.

I hope you are right that I will very likely never run out of money, relying on the 3-4% rule, with a little flexibility.
Time will tell.

I have the answer to the insurance question. It took me two years of research to discover the answer and since then I have been reducing my debt in preparation , paying off the house early with a 2.29 percent mortgage for 7 years as this procedure requires you to have little to no debt. Love him or hate him, thanks to obama and the affordable care act my wife and I can now reduce to half time, keep our kids at home saving the expense of daycare all while getting on government issued health insurance for free!

But, I’m a strong believer in still doing something that will earn a little money in retirement. If you’re a true Mustashien, your expenses will be so low, that any small passion project should cover them :)

I adopted such method and keep a spreadsheet. The taxable account will last me about 15 years with the assumption of 2.3% return per annum. This does not take into consideration the higher return which I get for investing monies in the shares and stock (also known as dividend growth investment).

I am 40 this year and the taxable account will run of fund when I am 55 with the prevailing rate of 2.3 % return. I still hold a full time employment. Having such buffer enable me to quit the rat race at any point of time. Flexibility is the way to go as per my perspective.

While I agree high deductibles can be considered shitty for people still in the accumulation stage of life you can elect a high deductible plan with your current employer. Get tax free savings on an HSA and have another tax free way to save for future medical expenses. Which if you keep yourself mostly healthy and just insure against catastrophic events will last the average person a very long time. Definitely an underutilized tool that can be very helpful with our current system.

The timing of this post is perfect! I just left a “re-balancing” meeting with my broker and he confirmed a suspicionI had. Essentially, I asked, what the reason why I should invest in the stock market? His reply, “because there’s lots of money to be made”.

That scares the crap out of me. I only invest to preserve what I have. This is the same guy that tries to steer me away from Index funds because he States that it’s like striving for a “C” grade, when his managed accounts perform higher. Now, I must admit, in the last ten years my ROI has been 11 – 12%. But my fees are 1.2%. After accounting for the fees, I am not that far ahead of the Market.

Something to think about. Had I just invested in index funds ten years ago (like MMM recommends), I would have had similar growth to my current portfolio and less than than half the fees. Please learn from my mistake. How much are you paying in portfolio management fees?

Hi Joey, I use managed accounts to manage risk not performance. Many managed accoutns use index funds now to control costs a bit and take advantage of efficient market hypothesis. The 1% fee you pay is for ongoing risk management, making sure your rebalancing, fund selection, strategic income plan possibly. Possibly tax loss harvesting and most importantly behavioral coaching. All this adds to substantially more than the 1% fee.

I know people that are do it yourselfers that hold significant amounts in cash due to emotional bias when it comes to investing. These are also the folks who try to time the market.

For example let’s say on 1MM you kept 200k in cash. That 200k would have grown to 500k during the last 10 in a balanced portfolio earning you $300,000. Over that same time period you paid $100,000 in fees.

R.e. the stock market always goes up: what are your thoughts about the lost decades in Japan? Don’t get me wrong, I’m totally in your boat and working hard on my ‘stache. But I’m also wondering how the hypothetical Japanese Mustachian in 1980 makes his or her retirement savings last for fifty years.

I retired 17 months ago, I don’t have any outside income, and despite the stock market swings, I barely look at balances on my accounts (once a quarter just to drop them in a little chart I made, because I’m a nerd). My plan is working as expected and I don’t have any plans to chase any outside income. The healthcare situation is the only thing that gives me pause because I had (and beat) cancer and I experienced firsthand the pain of a $10,000 deductible but that all happened while I was working and I felt like I could “make up” the money I spent to treat my disease easily. It gave me more empathy for folks who have chronic and expensive health conditions because most are not so privileged that $10,000 wouldn’t be a huge burden. I’m hoping members of the FI community can band together and start moving the needle on the healthcare issue somehow. I would get involved in whatever way I could on that one! Regardless, I’m in the same boat – I’m thankful for the expanded time to spend with friends and family, especially my kiddo who is already 11 and I realize acutely that my days with her under my roof may be less than a decade (or maybe a bit more).

James – I’m not sure what the exact figures are but according to Google, the forward P/E ratio of the Nikkei was about 70/1 in 1988 or early 1989, right before the the long collapse began. Right now, the American S&P is at about 15/1 at 2700 or so. In other words – picture the S&P with the same earnings as it has now but with a value of 13000 instead of 2700. That’s insane, and to me it would be obvious that you shouldn’t consider yourself safely retired if you’re starting with those kinds of valuations and counting on a 3% or 4% withdrawal rate to sustain you.

So maybe we can make a Mustachian Exception to the SWR principle when P/E ratios are too insane. What “insane” qualifies as is debatable, but we’re nowhere near there right now.

Also, if you’d retired in 1980 on a Nikkei-heavy portfolio, you would have had a spectacular 9 year run before the bust, so as long as your spending wasn’t ramped up too much you would have had a much lower withdrawal rate than 3%.

One more thing – I’m using normal forward P/E for guidance here not the CAPE ratio which doesn’t seem like a very useful tool for predicting future returns anymore (not going to get into the reasons why, that would require its own blog just to argue about)

I actually read a blog post recently about using CAPE10 to adjust SWR. Basically when you’re at high levels of CAPE10 your SWR goes down but when you’re at low levels it goes up. I can’t remember where it was though.

Using one of the CAPE metrics to estimate SWR seems like a clever way to handle the complexities of sequence-of-returns risk. Recently I looked, for the first time, at an inflation-adjusted index rather than the raw index figures. Seems like it’s most relevant to look at the index that way. Here’s a link to an inflation-adjusted Dow-Jones: https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart
It’s sobering to see that there are “lost decades” there. What if you retired with a DJIA of 7500 around 1965 and were spending the investments down all the way to 1982 when the inflation adjusted DOW was at 1/3 of that? Inflation adjusted, the DJIA didn’t make it back to the 1965 level until 1995! Maybe I’m missing something important here. I’d welcome any education or clarification, but it seems that one must be careful about boundless faith in the market or in one’s continuing good health.
Everyone has to make their own individual roll of the dice, but I feel OK about my decision to retire only after I had assets enough to use a withdrawal rate way below 4%

If you have been working on your frugality skills, you wouldn’t have to go back to the cubicle. You could choose a job you actually liked, even if it paid less. As long as you had some capital left, you’d also be in a position to undertake relevant training, or to start a business on your own terms rather than selling your soul to the highest bidder.

Great post, as always! I believe there’s also a psychological block to overcome when you retire early.

My wife and I retired a few years ago in our early 40s. Our yearly withdrawal rate is less than 2%, yet I still get a little jittery when the markets go down (silly, I know). I always have to just take a moment to look at the math, numbers, and logic of the big picture.

It’s so ingrained in our society to always be earning money, because you never know what might happen (e.g. Suze Orman’s tirade against FIRE), rather than having the courage and faith to step away and enjoy our well-earned freedom.

While I agree going with 100% stocks should produce a better rate of return in the long run, if you’ve already won the game then stop playing. Adding bonds or some other conservative investment to make up 30-50% of your portfolio when you retire can literally be a game changer. Let’s take two examples. I used real returns from the S&P index and the Total Bond Index over the time periods described below.

Let’s say you retired in 2000 with $1M invested in the total stock market index fund and need $40k to live. After 10 years and a 4% withdrawal rate, indexed to inflation (2% per year increase), your balance would be $462k. Think you would be able to handle that? How about in 2008 when your balance got as low as $391k? Would you confidently be able to say “the market always goes up” and withdrawal that +$40k? I’m betting you wouldn’t. Even using a 3% withdrawal rate your balance would be at $604k after 10 years. That’s 40% LESS than what you started with in 2000 at the “guaranteed not to fail” 3% drawdown rate and that INCLUDES a $150k gain since 2008 when you had a balance of $473k. Nobody knew in 2011 what the market would do but if your balance was 40% less than it was 10 years ago you wouldn’t be retired any longer.

Now, let’s use the other example. Let’s say you had a 50/50 stock/bond index portfolio in 2000. After 10 years at a 4% withdrawal rate indexed to the same inflation, even with the dotcom bust and biggest loss since the great depression, you would have a balance of $904k. If your withdrawal rate was 3% during that time period, indexed to inflation, your balance would be $1,060,000. You MADE money in potentially one of the worst 10 year periods in our history. Quite a difference. So much so that you could probably still be retired. : ) THAT’S the importance of asset allocation when you are no longer earning money from your job.

Granted if the market dropped that much you would change your spending habits (which is what this awesome blog is all about!) and probably would have gone back to work (at east part time) way earlier than 2010 but just understand that the 4% rule is just a guideline and that asset allocation is a VERY important thing to take into consideration when you hit your FI number.

Doesn’t this analysis neglect income tax? I would pay federal and state income tax…but maybe just at the capital gains rate (?). Regardless, withdrawing $40k would mean that I net somewhere between $30 and $35k, no?

The short answer is yes. MMM is neglecting income tax because federal income taxes are typically $0.00 in the scenario used in the article. I will walk through the tax calculation assuming the $40k in the article is for a family with a married filing jointly (MFJ) tax status.

For MFJ the preferential tax rate on qualified dividends and long term capital gains is 0% if you can keep your total taxable income under ~$77k.

One important thing to remember is that selling $31k of investments to fund your cost of living will not create $31k of capital gains. Your capital gains are calculated by taking the selling price of the shares you sell minus their tax basis. The tax basis of an investment is typically the cost you initially paid for the investment. So, for the sake of simplicity, lets assume the $500k taxable investment portfolio in the article is composed of investments that were originally purchased for $250k (i.e the investments have doubled in value from 250k to 500k). This means that, on average, when you sell $31k of investments we will deduct a tax basis of $15.5k (1/2 of 31k) to get a taxable capital gain of $15.5k (Selling price of 31k less tax basis of 15.5k).

So our gross income from the example in this article would be $24.5k (9k dividend plus 15.5k capital gain) even though the transactions create $40k of cash to cover our living expenses.

Finally, don’t forget our hypothetical MFJ taxpayer will be eligible for a $24k standard deduction. This means the taxable income in this scenario would be a measly $500 (24.5k gross income less 24k standard deduction). This $500 would be taxed at a rate of 0% since the income is from dividends and capital gains resulting in a total federal tax liability of $0.00.

A single individual would have more taxable income in this scenario but their final federal tax liability will still be $0.00.

You may owe some STATE income tax on the investment income in this scenario. Results will vary from state to state.

Check out gocurrycracker for some very detailed examples of how you can have a six figure income in retirement and still pay $0 federal income taxes.

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